N.Y. Busted for Chintzing on Old Tax Breaks

ALBANY, N.Y. (CN) – New York had revenue alone on its mind when it retroactively canceled old tax breaks given to businesses, the state’s highest court ruled. The state had adopted the measures in 2009 while trying to reform its once-vaunted economic development program. Created in 1986, the Empire Zones Program sought to stimulate private investment in areas of the state characterized by persistent poverty and high unemployment by giving qualifying businesses certain tax credits. As eligibility standards for the program relaxed and participation increased over the years, however, New York’s comptroller warned that participants might not be meeting the program’s job-creation and investment goals. Under the 2009 amendments, any business not up to snuff faced decertification. New York made the amendments retroactive to Jan. 1, 2008, meaning that any business that lost its eligibility in 2009 also lost its benefits for the 2008 tax year. A number of businesses that lost certification sued the state, and several judges eventually deemed retroactive application of the amendments improper. After the Appellate Division’s Albany- and Buffalo-based judicial departments affirmed, New York’s highest court, the Court of Appeals, also sided with the businesses, but on different grounds, Tuesday. It said retroactivity violated the businesses’ due-process rights, rather than being an unconstitutional taking of property. “The plaintiffs had no warning and no opportunity at any time in 2008 to alter their behavior in anticipation of the impact of the 2009 amendments,” Chief Judge Jonathan Lippman wrote for a four-member majority. Depending on how one interprets a 2010 “clarification” of the 2009 amendments, the retroactive period lasted from 16 months to 32 months, according to the ruling. Regardless of which number applies, “the length of retroactivity should be considered excessive and weighs against the state,” Lippman wrote. He also notes that “the Legislature did not have an important public purpose to make the law retroactive.” “The Legislature’s only purposes were to stem abuses in the Empire Zones Program (increasing the benefits to the public relative to the cost of the credits) and to increase tax receipts,” the 21-page decision states. Retroactively denying tax credits to certain businesses did nothing to spur investment or create jobs, according to the ruling. Instead, it “simply punished the program participants more harshly” for past behavior, Lippman wrote. “Furthermore, raising money for the state budget is not a particularly compelling justification,” he added. “Absent an unexpected loss of revenue, such a legislative purpose is insufficient to warrant retroactivity in a case where the other factors militate against it, as is the situation here.” Former Gov. David Paterson, who supported the 2009 amendments, had projected that they would save the state $90 million in fiscal 2009-10, according to the ruling. New York faced a $3.9 billion deficit that year as the U.S. recession took a toll. “There is no cognizable valid public purpose for the retroactive effect of the 2009 amendments, and all three factors weigh in favor of the plaintiffs,” Lippman wrote. “Therefore, we affirm the Appellate Division’s determinations in all five cases that the 2009 amendments should not be applied retroactively.” In a partial dissent, Judge Robert Smith said the majority had complicated the issue unnecessarily. “I cannot see that the taxpayers were justified in relying on their Empire Program Certifications as though they were property or contract rights,” Smith wrote. “In general … taxpayers are on notice that the tax laws are subject to change. … The length of the retroactive period, even putting it at thirty-two months, was not outrageous and for nineteen of those thirty-two months – from the time the governor proposed the 2009 Amendments, in January 2009, until the retroactive legislation was enacted in August 2010 – it was public knowledge that a retroactive change to the January 1, 2008, was being sought. … It is also true, of course, the that the legislation was designed to raise revenues and balance the budget – but that is what all taxation does.” The court’s newest judge, Sheila Abdus-Salaam, took no part in the decision. The plaintiffs were James Square Associates; J-P Group; Morris Builders; Hague Corp.; and WL LLC. The defendants were Dennis Mullen, then state commissioner of economic development; Jamie Woodard, then commissioner of taxation and finance; the state departments of economic development and taxation and finance; Empire State Development Corp.; and the Empire Zones Designation Board. Assistant Attorney General Andrew Bing argued for the state. Jonathan Fellows of Bond Schoeneck & King in Syracuse represented James Square. Jennifer Persico of Mosey Persico in Buffalo represented J-P Group. Philip Halpern of Collier, Halpern, Newberg, Nolletti & Bock in White Plains represented Morris Builders. Michelle Merola of Hodgson Russ in Albany represented Hague Corp. Robert Weiler of Green & Seifter in Syracuse represented WL LLC.